Involuntary unemployment in monopolistic competition under divisible labor supply and increasing returns to scale

Abstract

Using a model in which consumers’ utility is determined by consumption and savings, we show that the balanced budget multiplier is 1 in monopolistic competition even under divisible (or elastic) labor supply and increasing returns to scale, and we also prove the existence of involuntary unemployment when government expenditure is insufficient and that involuntary unemployment is not eliminated and full employment is not automatically achieved even if the nominal wage rate and prices are flexible. Also using a simple model we show that involuntary unemployment occurs in Nash equilibrium of a game with a firm and consumers.